I am unable to get the correct answers for questions #1, 4, 5, 8, 9, 10 and 11. If you could show me the working out for each of those - I would appreciate the help! These questions are related to a Mergers and Acquisition course - we are covering cost of debt capital, cost of equity capital, credit ratings, and WACC.

To: students in MGMT 416 From: Professor Sergey Chernenko Date: October 1, 2017 Re: sample midterm exam questions This document is not a sample midterm exam. It is sole purpose is to give you a sense for the types of questions (and their wording) that you may see on an actual exam, and thus to help you tailor your study strategies from the beginning of the semester. Many problems on the exam will rely on common values of the risk-free rate, market risk premium, corporate income tax rate, etc. Unless stated otherwise, you may use the following facts: rf = 2.17% rp = 4.37% = 40% 1. Consider the following investment project. Opening a mine requires an initial investment of $120M. The mine will generate cash ow of $35M over the next 5 years. Once coal runs out in year 5, you will have to pay remediation expense of $5M in years 6-10. The cost of capital is 8%. Would you invest in this project? Answer: NPV = 6.158M 2. What was the alternative hypothesis in the event study of additions to the S&P 500 index? 3. What was the pattern of cumulative abnormal returns (CARs) in the event study of seasoned equity oerings (SEOs)? (It may be helpful to draw a graph showing the rough pattern.) What could explain this pattern of investor reaction? 4. You are conducting an event study using data on the returns of the following stocks around an announcement of a change in corporate policy. What is CAR[0,1] ? Stock Market -2 1.60% 0.24% -1 0.33% -0.05% Stock A 0 1 4.60% -0.25% 0.75% -0.27% 2 2.78% -0.43% -2 2.04% -0.55% -1 -0.12% 0.03% Stock B 0 -0.71% -0.09% 1 -0.56% 3.37% 2 -1.94% -0.28% Answer: CAR[0,1] = 0.34% 5. This question is based on the Tottenham Hotspur case. In that case the team was considering signing a new player. The club would need to immediately pay a transfer fee of 20M. The club would enter into a 10-year contract, with a weekly salary of 50K, growing at 10% each year. If the player stayed healthy he would be expected to score 12 goals per season. However, similarly to other players, he would face a 20% chance of being sidelined due to injury during any given 1 season. Suppose each extra goal could be expected to increase annual revenue by 3M. If the cost of capital is 10%, what's the NPV of signing the new player? Answer: 84.593M 6. Below is information on the dollar value of Panera's capital expenditures and the number of company-operated bakery-cafes opened in each of the previous 4 years. 2015 115,552 57 Capital expenditures ($ thousands) New company-owned bakery-cafes 2014 109,941 65 2013 90,409 63 2012 72,683 59 What is your best estimate of how much it would cost to open a new company-operated bakery-cafe in 2016? Explain your reasoning. Answer: It depends. What matters here is not the number you report but your reasoning. 7. Below is an excerpt from Exhibit 9 of the Sun Microsystems case. Based on this information, what is your best estimate of the unlevered/asset beta to be used in valuing Sun? Explain your assumptions and calculations. Answer: It depends. What matters here is not the number you Sun Microsystems: Exhibit 9 Ticker Cap ($MM) Debt ($MM) Levered Bond Beta Rating Cash ($MM) Primarily Hardware Advanced Micro Devices Apple Dell EMC Hewlett-Packard Intel International Business Machines NetApp Sun Microsystems AMD AAPL DELL EMC HPQ INTC IBM NTAP JAVA 2,168 109,713 21,505 26,142 87,708 39,967 136,052 5,808 4,941 4,988 2,011 3,404 20,458 1,988 33,925 1,265 1,257 2.19 1.11 1.12 1.39 1.25 1.20 0.93 1.80 1.73 Ba1 933 24,490 9,546 6,446 10,140 8,840 12,907 2,604 3,061 Primarily Software Adobe Systems Microsoft Novell Oracle Red Hat ADBE MSFT NOVL ORCL RHT 12,944 170,795 1,353 96,180 3,482 350 2,000 122 11,238 - 1.32 0.99 1.50 1.27 1.20 Aaa B1 A2 BB 2,018 31,447 1,067 12,624 663 B A2 A2 A1 A1 Market data as of April 17, 2009 Data sources: Yahoo! Finance, Moody's, Bloomberg, and company filings. report but your reasoning. Note also that the Sun case is covered in the second half of the course and the exam would not ask you questions about cases that we have not discussed yet. 8. On 01/29/2015, EMC Corp reported its nancial results for the scal year ended 12/31/2014. Its free cash ow was $4,966 million. The rm said that it expects its cash ow to grow at 3.2% for 2 the foreseeable future. EMC Corp has $5,495 million in debt, $8,321 million in excess cash, and 2,035 million shares outstanding. If the rm's WACC is 9.0%, what is your best estimate of the rm's stock price? Answer: $44.81 9. Rivendell Voyages is going public using an auction IPO. The rm has received the following bids: Suppose Rivendell is looking to sell 750,000 shares, and you bid for 1,000 shares at $13.70. How Price $13.25 $13.50 $13.70 $13.80 $13.95 $14.00 $15.00 Number of Shares 200,000 50,000 400,000 330,000 250,000 80,000 25,000 many shares will you receive? Answer: 162.5 shares 10. Pinterest has raised $367m in new equity from new and existing investors, according to a regulatory ling published on Monday afternoon, taking the online scrapbooking site's total funding to $1.1bn. The Series G round values Pinterest at $11bn, the San Francisco-based company said, more than doubling its price tag in less than a year. It is 10 months since Pinterest's last big fundraising, when it raised $200m in primary nancing at a $5bn valuation from its existing investors, who include SV Angel, Bessemer Venture Partners, Fidelity, Rakuten and Andreessen Horowitz. Assuming that all valuation estimates mentioned in the article are pre-money, what fraction of the rm's shares is owned by investors in the Series G round? Answer: 3.23% 11. Below is the output of a linear regression of monthly returns of Johnson & Johnson (NYSE:JNJ) on the returns of S&P 500. What is the rm's cost of equity? Answer: 5.45% 3 SUMMARY\tOUTPUT Regression\tStatistics Multiple\tR 0.612 R\tSquare 0.375 Adjusted\tR\tSquare 0.364 Standard\tError 0.029 Observations 60 ANOVA df Regression Residual Total Intercept S&P\t500\treturn SS MS Significance F F 1 0.029 0.029 34.807 0.000 58 0.048 0.001 59 0.077 Standard Coefficients Error t\tStat P-value Lower\t95% Upper\t95% 0.005 0.004 1.374 0.175 - 0.002 0.013 0.750 0.127 5.900 0.000 0.495 1.004 12. Below is a snapshot of Eaton Corp (NYSE:ETN) most recent balance sheet. What are the weights of debt and equity that should be used for calculating the rm's WACC? Consolidated\tBalance\tSheets\t-\tUSD\t($) $\tin\tMillions Current\tassets Cash Short-term\tinvestments Accounts\treceivable\t-\tnet Inventory Prepaid\texpenses\tand\tother\tcurrent\tassets Total\tcurrent\tassets Net\tproperty,\tplant\tand\tequipment Goodwill Other\tnoncurrent\tassets Total\tassets Current\tliabilities Short-term\tdebt Current\tportion\tof\tlong-term\tdebt Accounts\tpayable Other\tcurrent\tliabilities Total\tcurrent\tliabilities Noncurrent\tliabilities Long-term\tdebt Other\tnoncurrent\tliabilities Total\tnoncurrent\tliabilities Shareholders'\tequity Total\tliabilities\tand\tequity Answer: not enough information is provided 4 Dec.\t31,\t2016 Dec.\t31,\t2015 $\t543 203 3,560 2,254 381 6,941 3,443 18,715 1,320 30,419 $\t268 177 3,479 2,323 369 6,616 3,565 19,493 1,322 30,996 14 1,552 1,718 2,201 5,485 426 242 1,758 2,199 4,625 6,711 3,282 9,993 14,941 $\t30,419 7,746 3,394 11,140 15,231 $\t30,996